Cable ISPs Set To Cash In On Small Markets
October 22, 1998
Inter@ctive Week via NewsEdge Corporation : Who says bigger is better? Not Cable Web Services Inc., The ISP Channel or Online System Services Inc. These and other cable Internet service providers are making a strong partnership play for smaller cable operators to tap into a market that the ISPs believe will be responsible for the lion's share of their profits over the next few years.
By targeting smaller cable providers, these second-tier cable ISPs are ceding the big cable operators to At Home Corp. (www.home.net) and Road Runner Group (www.rdrun.com), the national cable ISPs that are partly owned by cable's giants. At Home and Road Runner now dominate the cable data service market: At Home claims 150,000 subscribers, and Road Runner boasts 100,000 customers.
Both At Home and Road Runner are focused on offering service over cable networks that have been upgraded to offer two-way service, although both have discussed plans to deliver services for smaller and older cable networks.
Many smaller cable operators haven't upgraded their plants to handle two-way deployments, and they are still without a cable ISP -- a situation that is ripe for exploitation, says one cable ISP executive.
"The big guys are doing really well with the two-way, large deployments, " says Steve Getz, chief executive officer of Cable Web Services (www.homestream.com). "There's room for someone who can get smaller companies online right now, and that's what we're looking to do."
For smaller cable operators, companies like Cable Web Services may represent their best chance not only to deliver data service to subscribers, but also to turn a profit from that service. Because smaller cable operators' plants aren't upgraded, any company looking to provide Internet access has to provide a telephone line return path, necessitating not one but two modems for each subscriber. This can create problems with economies of scale, according to analysts.
No Economies Of Scale
Smaller operators, some of which have as few as 2,500 customers, don't have the customer base to get bulk discounts from equipment makers, analysts say. Cable operators are stuck shelling out cash for the modems that are priced at or close to retail prices, and the expense sits on their books. Cable Web Services is one of several companies that help cable operators circumvent this problem. It purchases and supplies not only the cable and dial-up modems, but also the headend equipment, including servers.
"The operators that we are talking to right now can be up and running within a few days," Getz says. "It lets them rationally get into business at the early states of broadband deployment. They get a foothold and income immediately without having to make a huge investment."
Cable Web Services isn't alone in offering what amounts to cable data outsourcing service for small operators. Online System Services (www.ossinc.net) has its own cable Internet service, which it calls i2u. Gwenael Hadan, the company's vice president of strategic development, says Online System's service is available to more than 4 million homes worldwide.
Convergence.com also has a strong foothold in the industry. The company (www.convergence.com) has installed cable Internet access up and down the East Coast and in several cities in California. The company isn't limiting its offering to cable companies, however; it's also looking to forge partnerships with electric utilities that want to get into the data business.
Convergence.com wants to expand its offerings beyond data, as well. Earlier this month, the company announced that it will add Internet Protocol telephony applications to its Internet service offerings.
Reaching Down
Second-tier cable ISPs may not have the small operator market all to themselves for long. Both At Home and Road Runner have said they will target smaller markets with new services.
"The notion that we haven't cared or aren't interested in the small market is an attempt by the bottom feeders in this market to cloud the waters," says Dean Gilbert, At Home's senior vice president and general manager."We have not forgotten any of those markets."
At Home is expected to announce a new service, called @Home Lite, that is designed specifically for small to midsized cable operators with subscriber bases of more than 2,500 users.
The service, which is expected to go live to operators early next year, will be a slightly scaled-down version of the current @Home service. The company expects to offer operators tiers of service with speeds ranging from 128 kilobits per second to 300 Kbps, Gilbert says.
Because those speeds don't come close to the megabit levels available on upgraded networks, the small-market version of @Home service won't have some features available on the full-blown version, such as full-motion video and digital on-demand music, Gilbert says.
At Home will offer financing and bulk discounts to operators to help them add Internet service, he adds.
Road Runner will take a different approach for delivering data service to small markets.
"Our strategy is, when it makes sense, we will deploy regionally to small, contiguous multiple service operators," says Bob Rusak, vice president of business development at Road Runner.
Road Runner probably will stay out of markets with subscriber bases of less than 10,000, Rusak says, adding that the company probably won't finance upgrades. "It may be too risky," he says.
Players And Their Wares
Company
Type Of Service
Number Of Cable Company Partners
At Home Corp. (www.home.net)
Access, financing
18
Cable Web Services Inc. (www.homestream.com)
Access, equipment, local content
Convergence.com (www.convergence.com)
Access, network management
14
Internet Ventures Inc. (www.perki.net)
Access, equipment, marketing, support
The ISP Channel (www.ispchannel.com)
Access, marketing, content, equipment install
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